Coverage Vs. Control

The pharmaceutical industry faces a clear trade-off in the current healthcare reform debate. On one hand, expanded coverage for some 45 million Americans would greatly enlarge the pool of customers for drugs and medical products, and enhance compliance with prescribed treatments. On the other hand, higher rebates and regulatory modifications could open the door to price controls and erode revenues. Industry has offered up concessions to help pay the trillion-dollar cost of achieving universal coverage, with an eye to staving off even harsher curbs on revenues that could jeopardize innovation.

While nothing comes easy in healthcare reform, devising ways to increase coverage is relatively uncomplicated. Congressional leaders have proposed broadening access to care by expanding Medicaid, requiring all individuals to obtain coverage, mandating that employers provide insurance or pay a penalty, reforming the insurance market to limit exclusions based on pre-existing conditions, and forming an insurance exchange that offers coverage options to the uninsured, including some kind of government-supported public plan.

That last item, in particular, has been a lightening rod for opponents of government involvement in healthcare. Pharma companies are alarmed over proposals authorizing government negotiation of prices for drugs covered by the public plan. While that's not as threatening as a full-scale repeal of the non-interference clause (which prevents federal negotiation of drug prices for Medicare Part D), it does open the door to a larger government role in pharma pricing. And even without a public plan, Congress is likely to establish some kind of federal health authority to make difficult decisions on payments and benefits, including medical product coverage, cost-effectiveness standards, and pricing decisions.

The Hunt for Savings

Devising a way to pay for the enormous cost of the program is even more difficult. The scope of that difficulty finally hit home in June when the Congressional Budget Office (CBO) issued a much-higher-than-expected cost estimate for reform legislation under development by the Senate Health, Education, Pensions and Labor (HELP) Committee. The draft proposal of that legislation would cost $1 trillion over the next decade, and extend coverage to only 16 million people. The Senate Finance Committee, facing an even higher $1.6 trillion CBO estimate for its proposal, went back to the drawing board to curb expenditures and identify more savings.

Meanwhile, House leaders rolled out a reform bill developed jointly by three committees: Education and Labor, Energy and Commerce, and Ways and Means. Democrats applauded its broad coverage and extensive benefits, and moved to pass the 1,000-plus-page measure as quickly as possible; Republicans predicted skyrocketing budget deficits, higher taxes, and government rationing of healthcare. Once again, CBO was the spoiler, testifying that little in the House legislation would curb federal spending on healthcare.

President Obama then went on the offensive, pressing hard for a reform bill with a $1 trillion, 10-year price tag that covers at least 75 percent of the uninsured. That proposal has expanded the hunt for every possible source of savings and revenue, putting pharma costs and coverage directly in the line of fire.

Last May, the Pharmaceutical Research and Manufacturers of America (PhRMA) joined a high-profile provider group that promised collectively to decrease the annual growth in healthcare outlays by 1.5 percent—a move calculated to save $2 trillion over 10 years. The group offered a list of "soft" savings strategies, including reducing unnecessary hospitalizations, promoting evidence-based best practices, managing chronic disease, and adopting health information technology.

Subsequently, PhRMA rolled out a plan to generate $80 billion in healthcare savings, starting with a striking proposal to give 50 percent discounts on drugs prescribed to Medicare patients who fall into the notorious Part D "doughnut hole." That proposal is attractive to reformers because it could save an estimated $25 billion off the cost of eliminating the coverage gap altogether. The discount plan was thus incorporated into the House bill's provision for phasing out the doughnut hole over 15 years. (Most biotech drugs are not affected because they are administered in hospitals or clinics, and thus covered under Medicare Part B. But as more biologics shift to outpatient use and gain coverage through Part D, the gap would become a greater hurdle.)

Drug companies are also slated to provide another $20 billion over 10 years by giving higher rebates on Medicaid drugs. Legislators propose to increase the basic rebate from 15 percent to 22 percent, extend rebates to new formulations of existing therapies, boost rebates on generic drugs, and require manufacturers to pay rebates to states for drugs provided to Medicare managed care plans.

Pharma companies had hoped the discount plan and higher rebates would defuse support for a proposal by House Energy & Commerce chairman Henry Waxman (D-CA) to impose an additional rebate on Part D drugs prescribed to low-income beneficiaries. Waxman is seeking to recoup the "windfall" gains manufacturers have enjoyed since Medicare shifted "dual eligible" seniors from Medicaid drug benefits to Part D. The additional rebate in the House bill is intended, once again, to offset the high cost of closing the doughnut hole.